The International Monetary Fund (IMF) issued a warning on Thursday to heavily indebted advanced economies saying they need to establish clear plans to reign in budget deficits before investors turn on them, identifying the US and Japan as the biggest laggards.
In its latest report on global debts and deficits, it said because of delayed fiscal adjustments in the US and Japan, the process of fiscal adjustments in other advanced economies will slow down.
IMF’s warning comes soon after S&P downgraded its rating of Japan over its staggering state debts.
In its Fiscal Monitor report, the IMF said: “in advanced economies where fiscal sustainability has not been a market concern, credible plans going well beyond 2011 need to be put in place urgently to lock in benevolent market sentiment”.
“Renewed market pressures in some advanced economies demand that these countries underline their commitment to their deficit targets and devise contingency plans to ensure that adjustment goals are met”, it went on to add.
The global financial crisis had forced many advanced countries to borrow heavily to meet their deficits, thus pushing their debts to record levels. In a report published earlier this week the IMF said that the ballooning deficits in certain European countries posed the gravest risk to the global financial systems.
The report said many European countries have undertaken austerity measures to cut their deficits with Spain’s budget slash the highest. But Europe still needs a more comprehensive plan to “break the fiscal-financial spiral”.
Sounding caution against the emerging markets as well, the report said that the fiscal deficit of Brazil, China and India were more than IMF has estimated in its November report, with Brazil’s deficit being ‘particularly pronounced’.